Electric Vehicles: Another Message from General Motors

Barrons (November 2020):

General Motors believes in an all-electric vehicle future, CEO and Chairman Mary Barra told Barron’s readers Thursday—and hinted at more news that could bolster the company’s alternative fuel offerings next week.

The legacy car manufacturer, founded over a century ago in Michigan, has recently been making a name for itself in the electric vehicle (EV) space.

It still is, but in a different way.

Axios (October 2023):

GM last week abandoned its target to produce 400,000 electric vehicles (EVs) through the first half of 2024, citing slowing demand, continued manufacturing bottlenecks and profitability concerns.

I wrote about this here. For a company to attempt a transformation of its entire business in response to bien-pensant consensus and government “encouragement” rather than on the basis of anticipated or actual consumer demand is not normally the pathway to success.

And so (via Reuters, November 29):

General Motors said on Wednesday its new labor deals after a lengthy U.S. strike will cost it $9.3 billion even as it outlined $10 billion in share buybacks, a 33% dividend increase.

When companies boost their dividend (especially when they do so in combination with a share buyback), their managements are doing one of two things, or both. They may be trying to cheer up their shareholders (in GM’s case, that may be quite a challenge: The stock is trading below where it was in early December 2018) and/or they have decided the most productive use of the company’s capital is to return some of it to shareholders, who can always put it to work elsewhere.

A few days ago, the Wall Street Journal’s Holman Jenkins took a look at what GM was up to. It’s worth reading the whole thing, but here are some highlights:

From time to time . . . when a presidential election is looming and a labor strike is dominating the news, [GM CEO] Mary Barra makes a point of emphasizing how much GM’s profits depend on gas-powered pickup trucks, not the electric cars that Washington wants her to build.

She did so at this point in the cycle in 2019, touting in a way that was meant to be noticed the enduring “earnings power of our full-size truck business.” On Wednesday, she did so again, ordering up a giant share buyback to underline the ability of gasoline-powered profits to keep covering GM’s losses on government-mandated electric vehicles and shower cash on shareholders.

Jenkins refers to Barra’s “reliable patter” about GM’s commitment to an “all-electric future” as a “fantasy.”

He then continues (my emphasis added):

Voters won’t tolerate limits on their choice of vehicle; politicians won’t ban gasoline cars however much they pretend otherwise, not least because the regulatory setup that politicians themselves long cultivated needs gasoline-powered profits to keep unionized auto workers employed.

Then why does GM’s share price remain dramatically depressed in relation to its expected earnings? The $10 billion Ms. Barra committed on Wednesday to a share buyback represents a quarter of the company’s entire value. Think about it. The most obvious explanation is that investors don’t see an escape yet from the government’s requirement that GM keep losing billions on electric vehicles the public doesn’t want, which Biden administration regulators insist must account for 50% of new car sales in just six years.

Jenkins is probably correct that investors are unimpressed by what the hugely capital-intensive EV mandates are likely to mean for GM. Switching (at vast expense) from manufacturing traditional cars that consumers want to buy to manufacturing EVs that may struggle to find a mass market could well mean that bailouts lie ahead for much of the auto sector.

But what about the politics of all this? Jenkins writes that voters will not “tolerate limits on their choice of vehicle,” and that the tipping point, politically, will come “when the public realizes that trillions spent on subsidies for electric cars and other green technologies are having no impact” on the rising CO₂ content of the atmosphere. I’m not so sure, although, if that message gets through, it will certainly not improve the public’s mood.

But if I had to guess, it’s more likely that a serious voter revolt against EVs will only occur when voters realize that the moment is rapidly approaching when, if they want a new car, they will be forced to choose an EV (unless, in the interim, major steps have been taken to improve EV technology, pricing, and infrastructure). That realization is likely to occur before the end of this decade, and, when it does, there will be major political trouble, especially if other aspects of the net-zero mandate are also beginning to bite hard by then. (Spoiler: In all probability, they will.)

But Jenkins argues that “politicians won’t ban gasoline cars however much they pretend otherwise, not least because the regulatory setup that politicians themselves long cultivated needs gasoline-powered profits to keep unionized autoworkers employed.” Throw in his own expectations of voter discontent, and that implies that the pace of the coerced switch to EVs will at least be slowed.

Again, I’m not so sure. Auto manufacturers may have already committed so much capital to EVs that reversing or even slowing the switch may plunge them into financial crisis. Their only hope may well be that the increasing regulatory squeeze on the purchase of new conventional cars will create sufficient “demand” for EVs for the sales to start coming through in large enough numbers and at a quick enough pace to fill the financial hole left by diminishing sales of internal-combustion-engine cars.

The chances of that happening will be increased if this squeeze is supplemented by “antipollution” regulations designed to push secondhand conventional cars off the road. The last thing automakers want to see is drivers postponing their switch to EVs by sticking far longer with the conventional cars they already own and then replacing them with secondhand cars that still rely on the internal-combustion engine. The fundamentalists currently steering U.S. climate policy would support such a squeeze. However, politicians, looking at voter resistance, may, within a year or so, no longer be so willing to go that far. That would be bad news for the auto companies, and, even if restrictions on selling new conventional cars are eased, they would be unlikely to have the financial strength to reenter the conventional-car market on a scale large enough to make a difference.

Put all this together and it’s easy to envisage a situation a few years hence when voters cannot buy the cars they want, carmakers cannot sell the cars they make, and politicians are unable to reverse the effect of the decisions that set the U.S. on this course in the first place. That’s not going to make for good times.